Philip Morris International Inc. (PM) Presents at CAGNY 2023 Conference (Transcript)

Philip Morris International Inc. (NYSE:PM) CAGNY 2023 Conference February 22, 2023 11:00 AM ET

Company Participants

Emmanuel Babeau - CFO

Conference Call Participants

Bonnie Herzog - Goldman Sachs

Unidentified Company Representative

[Technical Difficulty]

Philip Morris and another compelling presentation from the company that outlines the strategy of shifting smokers from 2 with reduced risk products and really outline the success of IQOS. The company has been quite active over the past year with its recent acquisition of Swedish Match, which bolstered its portfolio, but reduced risk products and this business is expected to push it's sales of smoke-free alternatives to nearly 40% of its total sales. So here to outline this compelling growth outlook for the business is Chief Financial Officer, Emmanuel Babeau. And Emmanuel, welcome back to CAGNY. Thank you for once again being a key supporter of CAGNY and for sponsoring the break this morning. So, thank you.

Emmanuel Babeau

Thank you, Chris. Thank you for welcoming me. Great to be here. I have to say it is not my first CAGNY, but it is certainly the first time the year with you in Boca Raton and it's so great to be in person and meeting all of you and I'm really looking-forward to the next 2 days, where I know we'll have plenty of moment to speak and discuss about the transformation that is going on at PMI. But before I want to certainly say words need to, thank you very, very warmly for everything you've been doing for PMI, you're a legend here in CAGNY, but you're also legend at PMI. And I'm so grateful for everything you've been doing and the way you welcome me when I joined almost 3 years ago was fantastic, so thank you so much for everything you've been doing.

As always, you know, I have to bring your attention on the Forward-Looking and Cautionary Statements and that explain the various reason why things could in actual fact differ materially from the objective, the target or the forward-looking statement that we can make. You probably have seen that this morning -- earlier this morning, we've been issuing a press release, where we reaffirmed the guidance that we made on the 9th of February with then prevailing exchange rate.

So, I think we will all agree to say that 2022 did happen in tough environment, the war in Ukraine, rapid degradation of the economic environment, surge in inflation for us, massive disruption on the supply chain, of course, exacerbated by what was happening in Ukraine and the impact in Russia. And despite that, we delivered in 2022 strong growth for both the top line and the bottom line. And I think 2022 will remain as a real landmark for PMI and a year of major step forward.

Actually, we are entering into 2023, with a view that we're going to further accelerate our journey to become the smoke-free company and with a lot of excitement at all the potential that we have ahead of us. It's going to be the year of the continuation of the rollout of ILUMA, I will elaborate on that, that is proving to be so successful. It's going to be a year where we are building new long-term partnership with KT&G. We're coming with new innovation with bonds still on the heat-not-burn category. And of course, this is a year where we're going to have the full benefit and integration of Swedish Match.

We've seen, we know of another leadership in another great smoke-free category and we see tremendous potential ahead of us. So that's really what I'm going to detail with you during the next 50 minutes. First of all, maybe, let's start with going through some key numbers that I think highlights where we stand in our journey to become smoke-free company.

$12 billion revenue that has been in 2022, if you take the full-year of Swedish Match, our revenue on smoke-free products. So it's something that is already very material and I think if we compare with the tobacco/nicotine industry, just this business could be already the fifth company by the size of the revenue. So, we are becoming smoke-free, this is happening fast.

Actually if you look at the percentage of the revenue that we've been achieving in '22 on smoke-free product and picking again the full-year of Swedish Match, we are already above 1/3 of the revenue of the company that is on smoke-free product. Behind that, you have millions of people who are adopting our product and going for better alternative to smoking just for IQOS user we took about roughly speaking 25 million user. We're going to add, of course, the user that are consuming Swedish Match rule product, certainly, a few million additional. And as I said, we now have fantastic team with IQOS by far the number-one brand for the heat-not-burn space and then the first nicotine pouch brand and I will have the opportunity to elaborate on that.

What does it mean? Well, it means that with this fantastic team and with the speed of the journey we have on becoming a smoke-free company, we are now a very strong growth company and it start with volume, which I think for many of you maybe not there obvious, I mean, how can a tobacco company owned tobacco/nicotine company be a growth company at the level of volume?

Well, with a target that we are for 2023, we would be growing for the third year in a row the total volumes and of course, that doesn't take into account here the additional growth in volume that Swedish Match is going to bring to us. And that is translating of course in a very strong growth at the level of the revenue and with the guidance that we gave for 2023. We would be further -- 3 year in a row growing above 7% organic our revenue so fast growing company, both at the level of volume and at the level of revenue.

IQOS is of course the big engine behind that, the performance that is outstanding. If you look at the 2022 period, we've been growing in volume close to 2%, but IQOS consumable were growing about 20% in CAGR. And with the acquisition of Swedish Match, we've just been improving that further, look at the growth year of nicotine pouches at Swedish Match, 44% over the same period of time and their overall business has been growing 13%. We've been very clear at the time of the acquisition of Swedish Match, Swedish Match is accretive to our growth, to our profitability and to our cash flow generation.

It means of course that we are in very good shape on our journey to become as the horizon of 2025, predominantly smoke-free company. I said 2022 with a full-year of Swedish Match would have been north of 1/3 of our revenue in smoke-free product. We said that for 2023, we are targeting to approach 40% and we have this ambition to be above 50% by 2025.

Now, it's not a dream and yes, maybe if everything goes well, we could be above 50%, it is actually what we are seeing in a growing number of market. We have actually to date 17 market, where more than 50% of our revenues are done on smoke-free product. You have few of them here, they are all very different in term of size, in term of specificities. What is interesting is actually if you just look at the market where we are commercializing to the IQOS, the lesser number of market where whether we haven't launched or more often where we are not allowed so far to launch IQOS, we already -- 40% of our revenue that is smoke-free in this perimeter. So I think it tells a lot about how fast we are moving towards smoke-free revenue above 50%.

Now, we thought it was important to here emphasize again the fact that we're not moving away from combustible cigarette to replace it with the business of lower quality. On the contrary, we are coming with a business that has a potential to be significantly better in term of growth of course and in term of profitability than the combustible business. And here, as a reminder, we've put the respective profitability per user and here we are talking about fully converted user by the different category. So look here obviously, the most profitable user is coming with IQOS and there is no mystery. The reason why we are able to generate higher per user revenue and profit is due to the fact that there is strong differential in the technology and therefore there is a strong addition and loyalty from the user and it's also, of course, the very strong commercial engine, the strength of the brand, IQOS is becoming a very, very strong brand. Just data that I think we haven't been showing so far yet.

In 17 market already, the brand attached to IQOS are both Marlboro as a market-share. So again I think it's another sign of how fast we are moving. What is interesting as well is that to get nicotine pouches, it is the second category and of course within, we have another strong brand and also with a better product and a very nice differentiation in term of quality of the product.

On vaping, we know that is a category that is having a bit more difficulty to generate a return customer loyalty is lower. There is most of the time a significant investment to put the device in the end-of-the user. And then with the pods, I mean, of course, it can become with an exclusive user a profitable category, but you don't get to the level today of IQOS heat-not-burn on nicotine pouches.

Let me now dig further on the profitability and the interest of the heat-not-burn category and IQOS. And the first element that I would like to emphasize is the fact that we are moving away from a category combustible cigarette, where we have a 25% market share. And we are growing heat-not-burn in a category where we have 75% market-share. So let's assume for one second, that we manage to transfer and switch all the smokers to heat-not-burn. That would be, in fact the multiplier by 3 of our volumes, given the difference of market share. And that is of course what is behind the growth in volume that we have been experimenting over the last 2 years and that we target for 2023.

But in addition to this accelerated growth, we are also coming at revenue per unit that is on average 2.5 time higher for our consumable for heat-not-burn versus our cigarette business, 2.5 time. And in addition to it, the gross margin rate for the consumable on heat-not-burn is 10 percentage point higher than on combustible cigarette. And that mean that the profit, the gross profit specific on the heat-not-burn business is about 2.8 time higher than on the combustible business.

So as you can see growing IQOS is a very profitable movement that the company is making. So it's true that in 2022, we did not see that for a very simple reason, actually 2 reason, the first one is that we are transitioning to ILUMA and there is a kind of temporary phase where we need to invest on the device to rapidly switch IQOS blade user to IQOS ILUMA and that mean that we have the impact of lower margin coming from more device and with commercially fourth behind the device.

There is also the I would say usual, non-fully optimized profile of the cost of goodwill launch a new product and it is still the case on the consumable of ILUMA. It is on several part of the supply chain, but notably on the weight as well of the consumable. So that's a temporary impact in 2022. We have been also facing lot of disruption as I mentioned the supply-chain due to what has been happening in Russia. And the impact of the war in Ukraine with as you know, we stopped all investment in Russia and all supply chain has been massively disrupted.

So we had to airfreight massively our product and the ILUMA consumable with several hundred million eating the P&L. So '23 is going be already better and the thing that all the difficulty are going to go where there will still be some air-freight. We're not going to get the fully optimized cost of goods in 2023 for ILUMA business, but as early as 2023, we are already expecting this heat-not-burn business to be accretive to our margin evolution. Nevertheless, not sufficiently to offset the big headwind that we're going to -- coming from inflation on our convertible business and that means that really we will have to wait for 2024 to resume global positive trajectory for our margin.

Rapidly here you can see the broad portfolio that we have now in smoke-free product. I think it's a portfolio that is second to none. Great presence in heat-not-burn, I'm going to elaborate on that. Second leadership that we have now in oral nicotine, notably resin and evapor where we have a more modest presence, of course, with [Viv and Vida].

Now what we are doing today on in I think is really interesting and I think it shows that we are making great progress, great inroad in our journey to develop the category. We started with something which was IQOS blade premium positioning and that was a great product, but we knew that there was some limitation in how we could cover the full customer spectrum with just one reference.

What we've been doing is to keep building the premium part with the launch of ILUMA, but also develop other offering through partnerships, through the launch of bonds to make sure that today we're going to be in a position whatever is the customer profile in term of purchasing power, in term of taste, in term of look and feel of what he wants to use to offer great product, great experience on heat-not-burn with the capacity to really convince all smokers to move to this better technology.

Remember, we started with IQOS blade, let's be clear, the almost 10 billion business that we have today, the foundational product has been IQOS blade, that is a great product. We've reached a big market share I think today for instance, if I take Hungary, where we haven't been launching yet ILUMA, we are close to 30% market share. So IQOS blade has been showing absolutely amazing potential to convert smoker to neat-not-burn.

With ILUMA, as you know, we're getting to the next generation in term of technology. We've been resolving the remaining pain point for the customer and I will elaborate on the ILUMA success, but we see clearly that this is boosting the growth of IQOS everywhere we've been launching. And then next to the premium, we are coming with, I would say simpler product, more probably design to cost, more value for money, simple, easy and experience. We have this partnership with the current company, KT&G, that we've been extending until 2038. They are a very innovative company. They came with this LIL, it's a Pin technology that is close to blade. Again, intuitive, simple experience and we believe that they have a great environment for innovation, probably a bit different from what we do in term of innovation. And therefore, we'll be able through the partnership to accelerate and come even with more proposal and more innovation in the future.

And the last innovation that we've made, bond blend, which is really targeting emerging country, people who want probably both a much simpler product as you can see from the device, it's peripheral heating. So it's a different technology. It's probably going to come with something that can be closer to a strong tobacco feeling. And we are just testing the product, both in the Philippines and in Colombia. And we're going to learn, of course, with this launch, the objective being to have a global phase out starting in 2024.

Now if I stand for one second on ILUMA, we've been today launching in 16 markets, ILUMA and these 16 markets represent already more than 50% of the total heat-not-burn volume, so it's quite significant. And I'm happy to report that whatever the market where we've been launching ILUMA, we've seen ILUMA accelerating the growth and bringing a lot of positive to the heat-not-burn environment. With ILUMA, we see the capacity to convert smoker that we are reluctant until now. We see the customer satisfaction going up because as I said, we've been resolving the remaining pain point that we had with IQOS blade. We see the loyalty and the going up and the [indiscernible] rate going down. So that is creating a very good space for accelerating the growth and really keeping our customer within the IQOS journey over a long period of time. And as you can see here, we talk about very different market again in terms of profile and type. But I'm going to elaborate on some of them and I'm going to start with Japan.

So the Japan curves are quite interesting to watch and look at it in detail. We launched ILUMA in Japan at the end of 2021. And as you can see, our market share was progressing but slowly and we're at 21% plus. And look at the acceleration since the launch of ILUMA, it has been -- gradually it has been progressive. I'm happy to report here that the market share at the beginning of '23 January was even reaching more than 27%. Be careful, this is here at the 3 store chain level, so it doesn't really fully reflect the full Japanese market, but it's a good indication of how the brand is doing globally.

You see that we have also, in Japan, implemented very successfully this 2-tier approach. The 2-tier being -- you have a premium product area, which is a consumable that is rational coming with broader range of flavor. And this is by far, as you can see, the big one with more than 17% market share. But of course, it's positioned at a product that is higher than the rest of the landscape. And we felt there was a need for some customer that don't necessarily have the same purchasing power to offer something simpler, less flavor, something probably closer some time to tobacco test and that's what we've been doing with SENTIA and therefore creating this 2-tier very successful where we capture anyone who wants to be in this premium experience of IQOS. And with SENTIA we are already today at 7%.

And look at the speed at which we've been phasing out Marlboro and [IT], so they were the consumable for IQOS blade. And it just show that with the right commercial effort, we are able to very rapidly switch away from IQOS blade to IQOS ILUMA, which is very good because that allows us to put the focus on the new consumable.

More recent launch now. We launched ILUMA and not at the global Italian country level in December. And as you can see, so be careful the curve here because you have a lot of seasonality on the Italian market. But the brand was growing, but since the launch at the beginning of December, we see a dramatic acceleration of the volume of ILUMA consumable in Italy. You see it in Rome, for instance, we have with 25% market share in Q4. And I have to say the start of ILUMA in Italy bodes very well for the coming months.

Well, that means that today, we have in 10 markets, a market share for the heated tobacco unit, so the consumable for IQOS above 15%. And actually, we are in 22 key cities, a market share above 15%, 22 key cities, capital, roughly speaking. And why am I here speaking about key cities? Well, it is because you may remember for those who attended our Investor Day 2 years ago that Jacek said something that was quite important. He said, well, look at our share in the key cities because this year in key cities, you're going to see it at the national level in the near future. And that is exactly what has been happening.

So if you look at all the country here, except Hungary that actually has been doing even better, we are today at the country level, very close to where we were 2 years ago at the capital of a key city level. And if you look at where we are now at the key city level today, that's probably once again a very good indication of where we will be in the near future in this country. So the IQOS growth story is not over, we are actually in the middle of the boom of that and there is much more to come.

Now another fantastic growth story, ZYN. Look and it's easy for us to say because we are not behind this growth, look at the very impressive growth of ZYN in the U.S. over the last 3 years actually because the brand was almost non-existent at the beginning of 2019. It's record after record. You may have seen that for what is available in term of public data in January, the year seems to be starting on a very encouraging note as well again. And doing that, they managed to be consistently in the recent quarter above 64%. And that's quite a remarkable performance because we know that some company within this environment of nicotine pouches are quite aggressive on pricing and sometime discounting. So that's really a tribute to the quality of the ZYN product and the strength of the brand.

Important as well is, of course and in line with my comment, the market share in value, so it's probably 64%, 65% in volume, but it's 75% in value, which is our market share in volume for IQOS. And what are the 2 engines behind the growth of ZYN? Well, very simple. First of all, of course, they keep increasing the number of stores here in the U.S. very gradually. You know that the brand started in the western part of the United States and it's gradually progressing through the country. But the other big driver is what they call the velocity and so it's not a world that we are using so far, but now we are the same family, we're going to use it. And the velocity is simply the number of can that are being sold per store and per week. And as you can see, there is also a very nice increase.

So 2 boosters today behind the growth of ZYN. And actually, if you look at this chart here, there is some analogy with what I was describing on key city and national market share a few minutes ago for IQOS. Because if you look at how the brand in volume and retail value, so not the brand, sorry, that's the whole nicotine pouch category, but of course, ZYN has lion share of that. When you look at the progress of the nicotine pouch category versus the cigarette category on the western part and you look at the growth in the U.S., well, it seems that there is a 2-year lag. So that is boding very well for the potential for nicotine pouches in general and for ZYN in particular to keep growing at a national level here in the U.S. in the coming years. So that's super, super encouraging.

Now let's pause for one second on the U.S. We believe that with ZYN first and with IQOS now coming, we have a kind of dream team here in the U.S. and I'm going to elaborate on that. But before that, I'd like to remind you of a few specificity of this great U.S. market. Well, the first one is that it is today, by far, the biggest market for smoke-free product in the world. And difficult to calculate, but roughly speaking, the value of the smoke free market here in the U.S. is about 50% of the rest of all the markets outside the U.S. I'm not taking into account China as you know, we're not present in China. So it's a big market. It's a very profitable market.

We believe that the profit tool here on nicotine product as a whole and of course, that does include combustible cigarette is about 20 billion. It's a market where the margin are high and that's great because it means that, of course, you can develop a brand in a very profitable manner. But it also mean that you have rapidly the capacity to invest in terms of commercial activity in marketing when you develop the brand because once again, it is a profitable market. It's going to be very special for us this market because there won't be any cannibalization between our product, our smoke-free product ZYN today, IQOS tomorrow. We're going to grow this product ZYN and IQOS as a net positive, every gain for ZYN and IQOS is not having any impact. We are hopefully switching smokers to this category, but it's not having any impact on an existing business and versus everything we've been doing so far, it is a big, big difference because in all other markets, Marlboro was normally the first victim of the growth of IQOS. That's not going to be the case in this country.

We are, I think, leading the way when it comes to tobacco harm reduction. We're going to have with IQOS 3 and with General, which is a snus brand of Swedish Match, the 2 only brand in the U.S. here smoke-free brand. that enjoy an MRTP from the FDA. So we're going to be, I would say, epitomizing the tobacco harm reduction and the fact that we are coming with product that are better for public health.

So we have seen -- we have a fantastic team with Swedish Match. We are so pleased to have them. I think the work they're doing is just amazing and you see their performance. But of course, now that we have the outlook for developing IQOS in the country, we're going to keep investing. And I would say there are 3 big areas in which we're going to invest. We're going to need more feet in the street, more salespeople for this IQOS brand. And therefore, we're going to recruit salespeople and we're going to increase the coverage, as you can imagine. We are also going to build the digital commercial engine that has made the success of IQOS in many, many, many country, addressing both the trade and the consumer, that's going to be investment. We're not going to start from a blank page.

We have been developing thing that for sure adapting that to the U.S. will represent significant investment. We are also going to invest on the regulatory engagement because state-by-state, it would be very important to have the right level of dialogue to precisely promote this better alternative to the combustible cigarette.

The good news is that this investment are also going to serve the Swedish Match business. So it should enable us to be more efficient, to help them to accelerate their development in some areas and globally, this is going to contribute to the success of both IQOS and ZYN and all Swedish Match portfolio.

Just to give you a few headline on how we're going to approach the commercial development of IQOS here in the U.S. Well, first of all, it has to be very clear that -- I mean we know IQOS very well. We've been developing the brand in 17 market. We've been seeing plenty of situation. Yes, of course, the U.S. market is specific, but we're not starting from a blank page where everything will have to be invented. There is a lot of learning. We've been, I think, with failures and with success learning what is working, what is not working, what is the best way to develop. I talk about the digital commercial engine that we're going to put behind IQOS.

So we're going to capitalize on that. And we have IQOS 3 today. We are the only heat-not-burn product with a PMTA. So we have this IQOS 3 and with 5 consumable authorized and some of them are with menthol. I'm not going to disclose, of course, for very obvious reason, where we're going to go first, but you can expect us to capitalize on states where we see both a big population of smokers of course, because we're here to convert smokers, but also a test and appetite for innovation. So that's going to be probably our North Star and gaining us on the choices of where we start to invest here in the U.S.

Some of the investment as I said, like the digital tool will be made upfront, but a large part will be made as we grow the presence of IQOS through the country, so gradually. And here certainly the capacity to launch ILUMA when we have a PMTA. And we know there is a lot of uncertainty on the time line today to get a PMTA, will probably have an impact on how we become fully global in the U.S.

We have another great opportunity, of course, with nicotine pouches. We talk about ZYN in the U.S., but we believe that nicotine pouches have a great potential outside the U.S. and not only in the Nordics. And there are really 2 reasons fundamental -- there are plenty of reasons, but 2 fundamental reason for that. The first one is that we can probably say that nicotine pouches are the ultimate level of tobacco harm reduction, if you want. Remember, IQOS has up to 95% reduction to the toxicant versus combustible cigarette. Here, it's not an inhalable product. So you could say you are a 100% reduction of inhaled toxicant. And I think we're going to come with data on oral nicotine and they are already available in the Nordic country that show the very significant impact on public health of culture, country where oral tobacco/nicotine is a prevailing way of consuming tobacco.

The second reason is that, nicotine pouches are super situational. This is a way to enjoy nicotine wherever you are, whatever you're doing. We know that with any inhalable product, you have a lot of restriction. Here, ZYN you can be in a restaurant, you can be in the plane. You can be in an office. You can enjoy your product and we are quite convinced that probably a number of people who are moving away from cigarette will use that mainly as a poly usage with other type of smoke-free products. So you could combine IQOS at certain moment of the day and ZYN at other moment that, that is driving a very, very powerful potential for the category.

We are, of course, committed to very responsible commercialization of this product to avoid any kind of risk of unintended usage for this product.

Now on vaping, well, vaping is probably the category where the volatility is the highest, let's face it. I think the truth of the category today is not what it was even 18 months ago. We've seen a big growth of the disposable device. 2 years ago, disposable was very, very limited. And it seems like a category where loyalty is low and things are moving very, very, very fast. Actually, we see 2 risk for the category. The first one is to be growing a business that ultimately will never be profitable because of this lack of loyalty and the fact that the consumer is moving very often from one product to another, one way of vaping to another, one brand to another, which can weaken the model to generate profit ultimately.

The second risk and I think we see it in many, many countries, is that it could lead to unappropriate and non-sustainable way of developing this product commercially, I mean and from a marketing standpoint. So we are committed for our part to develop vaping category, but where we can develop it in the profitable manner and with the highest standard of ethic and responsibility.

And we call for regulation I think to make sure that this category stay within acceptable area in term of commercial practices and impact. And precisely, that lead me to my next point, which is a very important point. As you can see, we are making tremendous effort to un-smoke the world. We're investing billions. We are being successful, but it is clear that we are going to need the help of the regulator to really accelerate the journey. And we believe that it is time to move away from emotion, dogma, sometime of currentism, let's face it and really go for science-based data for real market evidence of what this smoke-free product generate in terms of public health.

And that should translate into specific regulation, I mean this -- don't get me wrong, this move fill product should be regulated and we are calling for very clear regulation. But the regulation should enable to have a number of elements, incentivizing the smoker to switch to this better product. So that starts, of course, with higher excise duty in the way you communicate, in the health warning, in the flavor sometime that you can use. I think that there should be a reflection on how do you use flavor to a certain extent and maybe with limitation to switch from cigars to other category.

So all that is really important and we call all government to act decisively on that front. And we are very pleased and very encouraged to see that this is the case. Actually, we see a number of countries that are implementing the kind of regulation I was alluding to. Notably, when it comes to tax rate, today more than 20 countries in the world with a medium horizon planning for excise duty on heat-not-burn. I think it's really, really important.

We have market that are now opening the possibility for selling in not-burn and we got the good news a few weeks ago of Taiwan opening to IQOS, it was not the case so far. So we're going to be able to sell IQOS in Taiwan, which is a very good news. We see Philippines, as an example, adopting a full regulation, but really going through everything I've been mentioning from excise duty to possibility to communicate, explain and really make the decisive push behind better product versus combustible.

We see New Zealand that is clearly differentiating more and more combustible cigarette. As you know, they want to end in a generation combustible cigarette and with a very different policy for the smoke-free product. So that's going in the right direction. We're also happy to report that on nicotine pouches, we've seen a number of markets like Slovakia, Czech Republic, Sweden, Iceland that are now implementing nice regulation that are allowing for the commercial of nicotine pouches. So there is a momentum, but let's keep this momentum and let's make sure that the countries that are still reluctant and want to -- for some of them to apparently keep the combustible cigarette as the only option for smokers. Let's make sure that we are also changing here, course and mine.

A few words about combustible. I think what we've achieved very well over the past quarters is to clarify our ambition in combustible. The combustible category is shrinking worldwide and that is a great news. That's what we are here for. We are trying to reduce this category. But as long as it does exist, we want to retain leadership. And for a very simple reason, first of all, of course, that is being part of the build of all investment that we need to make on the smoke-free product.

Second, because if we want to convert smokers whether directly the consumer or through the trade, we need to keep this connection with strong market share in combustible, otherwise, we're going to become irrelevant. Third, because if we were to give up rapidly on combustible, the risk is that some player could say, well, that's quite easy, I'm just capturing the market share that PMI is dropping on combustible and I don't need to invest therefore on smoke-free product and on reduced risk product. So that's something that we want to absolutely avoid.

We have the ambition to maintain our share of the category despite the cannibalization coming from heat-not-burn and we did that quite nicely in 2022. We are still around 25%. And Marlboro is -- I was referring to the fact that in 17 market, Marlboro is now below IQOS. But Marlboro actually did progress in 2022 its share of the category and is close to 10%.

Okay. Now I want to -- and still have 10 minutes, so a few words on sustainability. As you know, sustainability is absolutely at the core of our journey to become a smoke-free company. And we're not going to be successful if we don't have a kind of central beam here to our journey. And like everybody, we're working on the 3 parameter, environmental, social governance. We are working on our impact on the planet. We are working on diversity, inclusion on human capital, on ethic, on human right, on our impact on community, we do all that, but there is a specificity to PMI.

We are approaching the exercise according to 2 axis. The first one that you have here, operational is the one you're going to find in every company. So this is really how we impact nature and diversity. This is everything about inclusion business integrity. We're doing that, like I said, I think every company is reporting doing that. We just want to be a role model on that. But the big specificity, of course, of PMI is that the second axis probably even more important for planet and society, this is the impact of our product, the fact that we develop products that are attractive to smoker and is going to continue them to move away from combustible cigarette. And that's about the way we design this product, are they attractive enough and how do we market them in order to avoid any kind of unintended usage.

And in order to make sure that we measure our progress on this sustainability journey, we established PMI Sustainability Index with 19 KPI. They are all measurable, auditable and will report, of course, on how we are progressing. And to ensure that the management was taking that as a top priority, 30% of the long-term incentive of the management is based on the achievement on this Sustainability Index.

Just here to say that beyond that, we've been recently clarifying what we want to do for our environmental footprint. And we are making, I think, excellent in road when it comes to climate change fight. We've been stepping up the bar in terms of carbon neutrality now that we target for Scope 1 and 2 2025, previously it was 2030 and we want to be fully carbon neutral, including Scope 3 by 2040.

We're also having some nice ambition when it comes to nature protection. For instance, if you look at biodiversity, we want to be 0 negative 10 years down the road on the full supply chain. When you look at forest management, we want to generate a responsible and sustainable management of forest with 2 impact, good social impact for our partner in the agricultural space, but also better carbon capture as an example.

So just 2 example on what we are doing on environment. I could have been talking about water as well. All that has been rewarded by the CDP gave us this great AAA rating. I think we are only a few company in the world, there are thousands of company, but a few company in the world are getting AAA rating and we are very proud to get that.

Of course, I cannot finish my presentation without having a few words about capital allocation. We are highly cash generative. We've been investing at the core of our business with the investment in Swedish Match and Swedish Match is making us even more cash generative. And we will have basically 2 clear objective in the foreseeable quarters.

One is going to be to deleverage the company after this core investment, it's going to come through cash flow generation and increase of the EBITDA. And the second one is to continue to reward our shareholder and we absolutely stick to this progressive dividend policy. There is only one way for the dividend and that's up. I think we're proud to say that we've been increasing dividend over the last 15 years. And if you look at the dividend in 2008, I think the dividend of 2022 was 176% increase.

So we are continuing our journey and we are making it step-after-step becoming a smoke-free company. ILUMA is the next stage of the rocket of IQOS and the IQOS brand is confirming quarter-after-quarter it's power, its strength and it's getting further momentum that's really exciting. As you know, we're coming with even more innovation. With ZYN, we have another leadership in another category and we believe that ZYN and IQOS together have the capacity to move away from combustible cigarette, a lot of smokers to better product.

Actually, when you look at Swedish Match, it is enhancing, as I said, the growth of the global PMI company, the profitability and the cash flow generation, but it is also bringing 2 additional fantastic opportunity. One is the U.S. market, we have ZYN, going to continue to grow fast, but it's a fantastic opportunity where we can develop a full portfolio of smoke-free product in the future. And as I said, there is this opportunity of nicotine pouches that we can grow and accelerate outside the U.S., thanks to the power of PMI.

So we keep investing and building a company that is delivering sustainable, profitable, strong growth for the benefit of our shareholder. And by doing that, we have a very positive contribution to public health and to society in general. Thank you very much.

Question-and-Answer Session

Q - Unidentified Analyst

And we have 5 minutes for questions.

Emmanuel Babeau

Bonnie?

Bonnie Herzog

Thanks. I guess I wanted to ask about the U.S. market. One of the key questions I've been getting from investors for a while is, why do you think you're going to be so successful in the U.S. market with IQOS, especially when you think about it being such a highly developed e-vapor market. So if you could touch on that and then maybe talk a little bit about some of the learnings because IQOS is obviously sold here in the U.S. through Altria. What were some of the learnings from that and maybe you'll do some things differently. And if you could share some of that with us, that would be great?

Emmanuel Babeau

Sure. So I'm not disputing the fact that the U.S. is a big fatigue market today, but you still have, I think, something close to 30 million smoker in the country. And the experience accumulated in many, many different market, all type of environment, regulation and so on, show the capacity that we have to convince a number of smokers to move to heat-not-burn. And we believe that in the U.S., I'm not able to tell you that we're going to be successful everywhere, but I think we have identified places already where we think that IQOS is going to resonate with smoker and has a strong potential.

Remember, there is one thing that we don't necessarily find in many market, but that we're going to find in the U.S., which is a capacity to communicate and explain. In many market, we are extremely constrained, the few markets in Europe where today we are to some extent stuck like France, even the tobacco is not entitled to speak about IQOS. So it's very difficult to do that.

Here in the U.S., we're going to have the capacity to explain, to elaborate, to go to enter into the detail, to contact the people. And we're starting with this Swedish Match platform, so we're not starting from scratch. So -- and we're going to be super focused and that's probably the connection with your second part of the question.

Yes, IQOS has not been successful so far, but I'm not sure it has really been launched until now. And there is one thing that we've been learning in the past in a few market where we launched in a few city, maybe in a state, it doesn't work. You need to create some -- a little bit of mass impact, just to create the availability for people who are not necessarily always at the same place. So it doesn't mean that we're going to go globally immediately in the U.S., as I explained, but certainly it means that we will need to put more ambition.

And as I explained, we're going to be very focused on something that is net positive. So we're not going to wonder, well, but if I do that, if I make this investment, yes, I'm going to get this volume extra volume, but I'm going to lose elsewhere. So the net is going to be negative. We're going to be genuinely and fully committed to grow a category that any kind of growth we generate is going to be net positive. And again, we're coming with 70 market of learnings and it doesn't mean we're not amble, I mean we're not saying it's going to be a work in the park. But we believe that there are places where IQOS is going to resonate very nicely with the consumer in the U.S.

Bonnie Herzog

Fine. Can you comment on how you're thinking about the incrementality of ILUMA based on the example in Japan, it seems like it's been very successful in converting existing IQOS users. But how do you envision it driving incremental growth and bringing new users into heat-not-burn.

Emmanuel Babeau

Yes, we see, as you said, already a number of market like Japan, it's probably one of the few markets where we have already a little bit of history after something like 14 months of presence of ILUMA. And as I explain, we show that the customer satisfaction is going up, the abandonment rate is going down and the loyalty is generally improved. We also managed to convert a number of smokers who so far were reluctant, whether because it was too complex and they were not fully maybe finding the ritual of a combustible cigarette with the previous IQOS blade, sometimes because the test was not exactly the same. We think we are fixing some of that and that is giving us extra opportunity to onboard more smokers if you want to this ILUMA journey.

So that's for me the incremental. Let's see whether -- what has been seen in Japan that I have been illustrating. And to be clear, we're not at the end of the development in Japan. Let's see whether we're going to have more learning elsewhere to exactly measure sense what's going to be the additional growth. But I think it's going to come along the lines I've described, convincing more smokers, more loyalty and globally entering into the IQOS experience in even fuller manner, I would say.

Unidentified Analyst

Let's end the presentation there and thank you to Emmanuel and PMI for...

Emmanuel Babeau

Thank you very much. And there is a breakout session next door for the one to join us. I know it's lunch time, but if you can spare a few minutes with us, we'll be delighted to host you. Thank you.

Unidentified Analyst

Thank you.